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From Securities Regulation Daily, February 16, 2018

SEC nixes Chicago Stock Exchange’s proposed acquisition by Chinese investment group

By Jacquelyn Lumb

The Commission has set aside the Division of Trading and Market’s approval of a rule proposal by the Chicago Stock Exchange that would permit the acquisition of CHX Holdings by North America Casin Holdings (NA Casin Holdings), resulting in a change in ownership. In reaching its decision, the Commission pointed to questions about the exchange’s compliance with its ownership and voting limitations; the exchange’s ability to monitor for future compliance with its own rules; a supermajority approval requirement in NA Casin Holdings’ certificate of incorporation; and the exchange’s ability to conduct sufficient oversight. These four issues were reason enough to set aside the division’s approval, according to the Commission, so it did not have to consider questions about the involvement of the Chinese government or the impact of Chinese foreign investment in a self-regulatory organization or in the U.S. markets more generally (Release No. 34-82727, February 15, 2018).

Initial approval stayed. The exchange first proposed its rule change contemplating the transaction in December 2016, and in January 2017, the SEC instituted proceedings to determine whether to approve it. The Commission designated a longer period on which to act on the proposal, and the exchange subsequently filed an amendment in August. That same month, the division approved the amended proposal by delegated authority. The division’s action was stayed while the Commission reviewed the proposal. The exchange filed a second amendment in November which was also included in the Commission’s review.

Under the terms of the transaction, the exchange would continue to be a wholly-owned subsidiary of CHX Holdings and all of the shares of NA Casin Holdings would be held by a group of firms and individuals. The proposal would amend provisions of CHX’s certificate of incorporation relating to ownership and voting limitations and establish in NA Casin Holdings’ certificate identical ownership and voting limitations. NA Casin Holdings’ certificate would include a supermajority vote requirement for certain corporate actions.

Questions about funding. During its review, the exchange provided documents on a confidential basis that raised additional questions or were insufficient to verify the source of funds that certain upstream owners would use for their part of the transaction. The documents also raised questions about potential undisclosed connections between purportedly unrelated members of the investor consortium. As the staff attempted to resolve the questions about funding, three investors withdrew from the proposed transaction, but their withdrawal did not allay concerns about a potential circumvention of the ownership limitations.

Questions about compliance. The proposed rule change would require extensive information-gathering and monitoring to ensure compliance with the ownership and voting limitations. The Commission said the exchange did not provide a sufficient basis for it to conclude that it could ensure compliance following the consummation of the transaction.

Questions about supermajority vote provision. The Commission also was unable to conclude that the supermajority approval requirement in NA Casin Holdings’ certificate was consistent with Section 6(b)(1) of the Exchange Act. The provision provided for a veto of certain transactions which the Commission said appeared contrary to the goal underlying the voting limitations. The introduction of the supermajority restriction after the withdrawal of three of the original investors, and the revisions to the pricing structure of the transaction, reinforced the Commission’s concerns about whether certain investors could dominate the investor group.

Questions about access to books and records. Finally, the exchange’s inability to obtain sufficient information to ensure compliance with the ownership and voting limitations during the rule filing process left the Commission unable to conclude that the transaction satisfied Section (6)(1)’s requirement that the exchange have the ability to carry out the purposes of the Exchange Act, including the allowance for sufficient Commission oversight. The exchange maintained that the Commission would have access to its books and records, but the Commission was unable to conclude that those assurances were sufficient given that the most significant shareholder of NA Casin Holdings would be wholly-owned by a foreign entity and material portions of the relevant records may not be under the exchange’s control.

The Commission acknowledged that it has approved certain exchange rules in the past that may have raised similar questions about access to books and records, but said this proposed transaction raised red flags and left open questions that did not exist in the other reviews.

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